Good morning, and welcome to the Mercantile Bank Corporation 2025 Third Quarter Earnings Results Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Nichole Kladder, Chief Marketing Officer of Mercantile Bank. Please go ahead.

Hello, and thank you for joining us today. Today, we will cover the company's financial results for 2025. The team members joining me this morning include Raymond Reitsma, President and Chief Executive Officer, as well as Charles Christmas, Executive Vice President and Chief Financial Officer. The agenda will begin with prepared remarks by both Raymond and Charles, and will include references to our presentation covering this quarter's results. You can access a copy of the presentation as well as the press release sent earlier today by visiting mercbank.com. After our prepared remarks, we will then open the call to your questions. Before we begin, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company's business. The company's actual results could differ materially from any forward-looking statements made today due to factors described in the company's latest Securities and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during the call. Let's begin. Raymond?

Thanks, Nichole. Our results for 2025 build on the theme of commercial expertise generating a strong return profile. We continue to demonstrate top quartile ROA performance relative to our peers built upon the following traits. Trait number one, a strong and stable net interest margin. Over the last five quarters, the SOFR ninety-day average rate has dropped 96 basis points while our margin has dropped by a mere two basis points to 3.5%. This illustrates effective execution of our strategic objective to maintain a steady margin via match funding of our assets and liabilities and refutes the notion that we have an asset-sensitive balance sheet despite the relatively large portion of floating rate assets. Trait number two, very strong asset quality. Past due loans remain at the low levels typical of our company at 16 basis points of total loans. Non-performing loans to loans over the last five years plus the year-to-date period averaged 13 basis points. The allowance for credit losses stands at 1.28% of total loans as of 09/30/2025, providing very strong coverage relative to past due and non-performing loan levels. These numbers demonstrate our longstanding commitment to excellence in underwriting loan administration. Trait number three, improved on-balance sheet liquidity and loan-to-deposit ratio. Our loan-to-deposit ratio stands at 96%, compared to 102% on 09/30/2024, and 110% on 12/31/2023. Our deposit mix includes 25% non-interest-bearing deposits and 20% lower-cost deposits which have contributed to the stability of our net interest margin. Our previously announced planned acquisition of Eastern Michigan Financial Corporation will contribute positively to each of these measures. Trait number four, strong deposit and loan compounded annual growth rates. For 2025, annualized deposit growth was 9%. Our recent focus on deposit growth is not new to our bank. In fact, the last six year-end periods demonstrate a deposit…

Thanks, Raymond. This morning, we announced net income of $23.8 million or $1.46 per diluted share for 2025 compared with net income of $19.6 million or $1.22 per diluted share for 2024. Net income during the first nine months of 2025 totaled $65.9 million or $4.06 per diluted share compared with $60 million or $3.72 per diluted share for the respective prior year period. Growth in net income during both time frames largely reflected increased net interest income and non-interest income, lower provision expense, and reduced federal income tax expense, which more than offset increased overhead costs. Interest income on loans was similar during the third quarter of 2025 compared to the prior year periods reflecting loan growth that was mitigated by a lower yield on loans. Average loans totaled $4.6 billion during 2025 compared to $4.47 billion during 2024, an increase of $210 million which equates to a growth rate of over 4%. Our yield on loans during 2025 was 31 basis points lower than 2024 largely reflecting the aggregate 100 basis point decline in the federal funds rate during the last four months of 2024 and the additional 25 basis point decrease during late third quarter 2025. Interest income on securities increased during the third quarter and first nine months of 2025 compared to the prior year periods, reflecting growth in the securities portfolio and the reinvestment of lower-yielding investments in a higher interest rate environment. Interest income on interest-earning deposits, a vast majority of which is comprised of funds on deposit with the Federal Reserve Bank of Chicago, increased during the third quarter and first nine months of 2025 compared to the respective prior year periods reflecting higher average balances that were partially offset by lower yields. In total, interest income was $2.2 million and $8.9 million…

Thank you, Charles. That concludes the prepared remarks from management, and we will now move to the question and answer portion of the call.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up the handset before pressing the keys. Our first question comes from Brendan Nosal with Hovde Group. Please go ahead.

Hey. Good morning, guys. Hope you're doing well.

Morning. Morning.

Maybe starting off here on credit quality. I think you had net recoveries in seven of the past eight quarters. I'm just kind of curious, where are you finding recoveries at this point in the cycle? And just given how clean the book has been for a couple of years, like what do you think of as a normalized charge-off ratio given your credit box and portfolio mix at this point?

Well, as it relates to where they come from, we've taken a pretty conservative stance over our company's history on what we charge off, and we're fairly relentless about recovering those once we do charge them off. So some of those go back a ways. And we just, you know, kind of never say die as it relates to a charge-off. As it relates to a normalized level, I'll let Charles answer that.

Yeah. So I'll make one comment specifically on the third quarter. Part of that recovery was on a loan that we charged off in the fourth quarter of last year. And that credit remains in active recovery status. We typically budget between five and ten basis points of net charge-offs. I think from a historical perspective, Ralph, you know, obviously, excluding the Great Recession, that makes sense to us.

Okay. Okay. That's helpful color. Maybe turning to the net interest margin. Just kind of thinking conceptually about the margin a little bit beyond the fourth quarter. I guess, on the one hand, rate cuts are maybe a modest headwind for the margin, but you're going to be putting all that liquidity from Eastern Michigan to work across the next year. So how do those things balance out kind of in the direction the margin takes over the next couple of quarters?

Yeah. I think you're spot on. Obviously, the acquisition will be beneficial to the net interest margin. That was clearly, you know, something that we saw and look forward to benefiting from. You know, I think part you know, we as I mentioned in my prepared remarks, we do have the lower rate loans and securities that will continue to reprice, you know, quite a bit. Even if the rates do market rates continue to come down, there's still quite a bit of significant opportunity there to gain some interest income. And, you know, we do have time deposits that are at higher rates than current market even today. So those will be you know, though everything we just talked about will be, you know, very strong tailwinds. You know, the one headwind is the reduction of the Fed funds rate. And, you know, part of the answer to your question is just how aggressive the Fed gets. But we believe on an overall basis that regardless of what the Fed does, our net interest margin will remain relatively steady. Because of all those things.

Okay. And then just as a follow-up, on that lower rate loan and repricing. Can you just size up that opportunity over the next twelve months? How much back book low rate stuff do you have coming due? And at what rate?

Yeah. I would say probably well, I'm gonna go by memory here. So we have about $90 million in securities that have an average yield of about 1%. We're getting about three seventy-five to maybe 4% currently on that. We have about $160 million in commercial real estate loans that will mature next year. And those, I think, are at an average rate of about 4.5%. And then we also have some portfolio adjustable rate mortgage loans I don't know off the top of my head, but there's some that are coming up for initial repricing. And there's definitely some solid tailwind in those as well.

Okay. Alright. Well, thank you all for taking my questions. I appreciate it.

You bet. You bet.

And the next question comes from Daniel Tamayo with Raymond James. Please go ahead.

Thank you. Good morning, guys. I guess first on just on the paydowns. You talked a lot about it in the prepared remarks. So did I hear this right that it was basically the paydowns that you're expecting for the back half of the year you recognized in the third quarter? And if that's the case, how should we think about that 5% to 7% loan growth guidance? I mean, it's about where it's basically where you guys have been historically. Is there a chance that's elevated in the fourth quarter and then back to normal next year? Or what's the thinking around that number and how the paydowns play into that?

Yeah, Dan. This is Charles, and I'll take a first stab at it. And, you know, one of the things about paydowns is you know some of them are coming. You know, generally, we get the paydowns from the sale of the assets, the underlying assets. Or the refinance of the loan to the secondary market, and that's especially true for multi-family. And you kind of get an idea that they're coming, but clearly, we don't have any control over that. So the timing becomes, you know, relatively suspect. But, you know, sitting towards the end of the second quarter, the ones that we got in the third quarter, we knew they were coming. It was just a matter of at what month and in which quarter that was gonna take place. You know, we're always getting some level of paydowns from quarter to quarter because of the activity of our borrowers, and that's not going to change. I think we just kind of, you know, like our commercial loan funding, sometimes quarter to quarter, it gets a little bit bigger. It'll it's a little more lumpy as you go quarter to quarter. And so the same thing happens with fundings. The same thing happens with payoffs as well. As Raymond mentioned, we got a very, very strong pipeline right now. The big question regards to the fourth quarter is when does all of that close? We definitely have some expected closings here in the first half of the quarter. But we also have some fundings that are expected to close, you know, towards year-end. And, you know, whether that happens in December or whether that happens in January, that's just difficult to tell. So that's just relative to our lumpiness, and sometimes we get quarter to quarters that are a little bit more abnormally lumpy, if I can say that. I think in regards to the future, we're looking at continued, you know, mid-single digits loan growth. We tried to peg that. I tried to peg that at 5% to 7% for the fourth quarter knowing what I was just talking about. That there you know, that could be a little bit off. If it's gonna be off, it's probably more likely that the loan growth will be higher than that. With a lot of that coming at right at the quarter end. But, you know, as we start to prepare our budget, we really haven't started doing a lot with that yet. Again, the higher end of maybe five to seven, maybe 6% to 8% is kinda what we're thinking about for next year.

Very helpful. Thank you. And then I guess you know, taking a look at the expenses, they're a little bit higher in the third quarter than I was looking for. And then the guidance takes a step up from that. Just curious if there's anything unexpected or unusual in the expense base or if that's a relatively clean number putting aside the acquisition to look at going into the fourth quarter? I mean 2026, sorry.

Yeah, Danny. I would say the third quarter, you know, except for the ones that we highlighted, that the, you know, the acquisition costs and the contribution to our foundation, I think, you know, there's definitely you know, I think those are good run rates if you make those two adjustments. But I will say in the guidance that we gave for the fourth quarter, that includes about $1 million in acquisition costs. And that makes the assumption that the acquisition is closed by the end of this quarter.

Okay. So that includes a million of acquisition. Alright. That's helpful. And that brings things back to kinda where we thought they were. Okay. Appreciate it. I was gonna so there's nothing on the tax line that is factoring in with the credits that that flows through expenses now. Right? That doesn't impact that.

Yeah. The tax things that we talk about are just the impact on the federal income tax line item. They don't impact overhead.

Okay. Great. Okay. I'll step back. Thanks, guys.

Thank you.

And the next question comes from Damon Del Monte with KBW. Please go ahead.

Hey, good morning, guys. Hope you're all doing well. Just to follow-up on the expense question there. Can you just remind us, Charles, the kind of the timing or the cadence of when you expect to realize the cost saves? As far as like systems conversion and kind of where you can really see some of that leverage from the cost savings from the Eastern Michigan deal?

Yeah. So there's obviously two big things going on there. And, you know, there'll be some cost saves next year relative to the Eastern acquisition. Although, quite frankly, most of the cost saves are gonna start taking place in 2027. We're planning on the core merger the core conversion, I should say, will be in February 2027. And until that time, we'll actually be a two-bank holding company with Mercantile and Eastern both running continuing to run as they are today. So from and from a day-to-day operations standpoint, the cost saves are really a 2027 event. Now with the merger itself of the parent companies, there'll definitely be some cost saves, some overhead cost saves there. But as we talked about with the announcement is that cost saves are gonna be a little bit longer. Than typical because of the delay in the merging of the two banks together. Themselves. And then, like I said, the core conversion is set for February 2027. There will be some costs that will expense in 2026 relative to the preparation for that. We'll definitely highlight that in the income statement as it comes through. But once the conversion takes place, there'll be some pretty significant savings as we go forward from that. There's gonna be a little bit of a mistiming there as we prepare for the core conversion, Already started, but definitely through next year. There'll be some upfront costs, but the savings thereafter will be significantly higher. Than those upfront costs.

Got it. Great. Appreciate that color. And with regards to the tax rate, you know, how do you think about '26 if, like, you don't have any more purchase transferable tax credits. Or do you expect there to be some in '26 that would impact that number?

Yeah. So, Damon, as I mentioned, we're just starting to get into the tax rates I think if you said, you know, we're you're not gonna do any energy credits, that's probably gonna be somewhere around an 18. Maybe 17 and a half percent. Somewhere in there. Don't quote me on that. But we are planning on doing some additional energy tax credits And, you know, right now, they're you know, we're closing one, I think, later this week or next week. They're still available. Obviously, there's a lot of due diligence that needs to go through that process. And we do have capacity to do them next year. We are planning on doing that. Next year. We'll even budget for that. If we're able to maximize what we can do from a tax perspective, our tax rate will probably be closer to 16%.

Got it. Okay. Great. And then just lastly, obviously, trends are pretty positive here. But as we think about the provision and growth kind of coming back online here in the fourth quarter, do we kind of use the first and second quarter as a good barometer for what we could look for a quarterly provision in the fourth quarter?

Yeah. I think that's pretty good. You know, obviously, the credit quality remains very strong. And, you know, we're always chasing some credits in good times and bad times, but continue to do that and, you know, establish specific reserves when we think that's appropriate. To do. The prepayment speeds on the mortgage loans, which obviously had an impact in the third quarter, that's an annual event for us. For the most part. We look at it each quarter, but in general, we look at it comprehensively once a year. So not a you know, if rates change dramatically and we see some significant changes in prepayments, you know, from quarter to quarter, we'll definitely address it. But I would say on an overall basis, taking into account our asset quality and our growth expectations, I think your comment is accurate.

Great. Okay. That's all that I had. Thank you very much.

Yep.

And the next question comes from Nathan Race with Piper Sandler.

Hey, guys. Good morning. Thank you for taking the questions.

Sure.

Going back to the margin discussion, curious, you know, how aggressive you guys can be in terms of, you know, reducing deposit rates on the $3.8 billion of funding that you call out on slide eighteen and if you could mention, Charles, maybe what the spot rate of deposits were at the end of the quarter relative to the $2.20 all-in cost in three two.

Yeah. A lot of numbers there. I think one of the things that we have done in done this as part of bringing in money market accounts, which obviously we've seen a lot of growth in, is, you know, we've told the depositors that, you know, we change rates in that product relative to the change in rates in the Fed funds rate. So there's been no surprises there. As a matter of fact, some of those deposit accounts actually legally are tied to the fed funds rate. But that's how we manage all of the products within the money market account. So we've been you know, we would continue to either increase them basis point for basis point or reduce them basis point for basis point at least into the near future. Based on changes in the Fed funds rate. So that's immediate. So it matches up well. With the any changes, you know, with the changes that would happen on our commercial loans. Relative to any changes that take place with the Fed funds rate. So, you know, some solid matching there. You know, time deposits, a vast majority of our time deposits mature within one year. And I would say based on rates today, that's about 50 basis points. On average of a reduction in time deposits. So that would take into account the expected of next week's cut. And then, you know, most of the rest of the benefit is on the asset side.

Okay. Great. And, obviously, there was a notable M&A transaction involving, you know, two large competitors in your home state there. So just curious, bigger picture, where you may see opportunities either to maybe add production talent or just add you know, some high-quality commercial clients over the next couple of years as that integration unfolds.

Yeah. I mean, historically, combinations of those types have been fertile ground for us in terms of developing business. And attracting more talent. And know, how this one plays out remains to be seen, but that has been the historical pattern.

Okay. Understood. And then one last one. I think you called out, you know, a $3 million specific allocation on the commercial credit that moved to nonperforming. 2Q. Just curious, expectations on potential loss there and timing as well, just given that specific allocation?

Yeah. It's really too early to tell. And it's a process we're working through and it has our full attention. But as we get further into it, we'll make the decisions on those scores that are appropriate.

I will add that we've been very aggressive in putting specific allocations against that credit.

Yeah. Understood. I appreciate all the color. Thanks, guys.

You bet. You bet.

Again, if you have a question, please press star and then 1. Our next question comes from Brendan Nosal with Hovde Group. Please go ahead.

Hey. Just one or two follow-ups here. Hate to beat the dead horse. On the expense number for next quarter. I just want to make sure I get the pieces. Does that number for the fourth quarter that you're providing include a partial quarter of run rate expenses from Eastern? Or is it just the merger charges?

No. Just the merger charges. We're basically planning for a year-end consummation, so there would be no income statement from Eastern on our numbers. So the only thing would be there is about a million dollars anticipated million dollars or so basically, closing costs.

Okay. Perfect. And then just one on fee income just because it hasn't been asked about yet. The debit and credit sorry. The debit and credit card income line was up, like, 30% both linked quarter and year over year. Just kind of curious if there's anything funky going on in that line item this quarter and kind of where you expect that particular number to come in versus this quarter's $3.1 million.

Yeah. Those numbers sound a little high to us as far as the increases go. I would say just in general, on the card program, it continues to grow quite well. You know, it's designed primarily for our commercial customers. It's a product that's well received and most importantly, well used. That's very much that line item is very much a volume-driven line item. And so the more that we can sell, but also ensuring that our that it's a solid product and one that our customers can and want to use. That's also very important because, again, it is a transaction-driven line that's been doing very well for us. And as we continue to get penetration of those programs into our existing base and of course, with the new growth, on the C&I side, plenty of opportunities to continue to grow that line item.

Okay. Alright. Thanks for taking the follow-ups. I appreciate it.

You bet.

This concludes our question and answer session. I would like to turn the conference back over to Raymond Reitsma for any closing remarks.

So we want to thank you for your participation in today's call. For your interest in Mercantile Bank, and that concludes the call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.